New York \u2013 Over the past few months, investors and analysts have been closely watching the shadowy corner of finance known as private credit, where warning signals feed fears of a repeat of the 2008 crisis.<\/p>\n
Whether these signals indicate only a few isolated missteps or point to a deeper systemic weakness in a sector worth about $1.8 trillion is still unclear. But if a second probability exists even in theory, it\u2019s worth understanding what\u2019s happening.<\/p>\n
Private credit, in simple terms, means lending money directly to private companies without banks. Borrowers are typically small and mid-sized firms that banks might deem too risky or complex for traditional lending \u2013 and they are willing to pay a higher interest rate for speed and flexibility in financing.<\/p>\n
How it works: large asset managers raise money from investors, such as pension funds and insurance companies, seeking higher returns than the bond market offers. Private credit funds provide loans to private companies that are sometimes turned down for traditional financing.<\/p>\n
This practice isn\u2019t new, but it has grown substantially since the 2008 financial crisis, when governments eased restrictions on bank lending.<\/p>\n
The problem is that troubles in private credit can quickly become public. <\/p>\n
\n\u201cIn many cases you have an opaque bundle of loans that support opaque companies. You can imagine a scenario where this is unpleasant but relatively safe, but you can also imagine a scenario where many missteps are hidden.\u201d<\/p>\n
\u2013 Steve Sosnick\n<\/p><\/blockquote>\n
Tensions around Blue Owl, Blackstone, and others<\/p>\n
In recent weeks, private credit investors have demanded the return of their funds due to concerns that loans tied to high-risk companies \u2013 many of which are software firms \u2013 could have been overvalued. Some analysts forecast that AI and other technologies could trigger a wave of defaults among mid-market software and business-services companies that had become attractive to private lenders during the pandemic.<\/p>\n
Most concerns have centered around asset manager Blue Owl, which last month faced a large surge of redemption requests, forcing it to suspend withdrawals of assets and liquidate them to pay investors.<\/p>\n
While Blue Owl sought to reassure Wall Street that this isn\u2019t a sign of weakness, its shares have fallen about 15% over the past two weeks. Forecasts of further declines have also risen, notably due to an increase in short positions against the company, according to S3 Partners.<\/p>\n
This week the tension rose again after Blackstone, a giant in private equity, also sought to raise about $3.8 billion in loans for its flagship private credit fund. According to Bloomberg, at least 25 senior executives across different divisions of the firm contributed roughly $150 million from their own pockets to cover the costs.<\/p>\n
Shares of other alternative asset managers, including KKR, Ares Management and Carlyle, have also come under pressure.<\/p>\n
\n\u201cThis is the first real test of the market,\u201d \u2013 said John Bringardner, executive editor of Debtwire. \u201cPeople borrowed a bit too much in that post-COVID period when markets were saturated\u2026 What you\u2019re seeing is part of this \u2018turbulence\u2019.\u201d<\/p>\n
\u2013 John Bringardner\n<\/p><\/blockquote>\n
For some influential investors, parallels with the subprime mortgage crisis appear obvious. Jamie Dimon, head of JPMorgan Chase, said some companies \u201care doing stupid things\u201d and voiced concerns about the \u201cbugs\u201d in private credit. Mohamed El-Erian raised the question of whether there are problems at Blue Owl being a \u201ccanary in the coal mine,\u201d recalling 2007.<\/p>\n
Yet on Wall Street there is still no single consensus: some analysts and fund managers consider the concerns exaggerated.<\/p>\n
\u201cWe just need to take a step back and look at the bigger picture: it isn\u2019t as large a threat to the economy in the near term as 2008\u2026 but there are so many events unfolding that no one feels entirely confident,\u201d said Bruce Flatt, chair of Brookfield Corp., in an interview with Bloomberg TV.<\/p>\n
Analysts say wise investors should stay vigilant about the private credit landscape and avoid panic.<\/p>\n
\n\u201cHow did you go crazy? First slowly, then all at once.\u201d And that\u2019s exactly how these crises unfold.<\/p>\n
\u2013 Ernest Hemingway\n<\/p><\/blockquote>\n","protected":false},"excerpt":{"rendered":"New York \u2013 Over the past few months, investors and analysts have been closely watching the shadowy corner…\n","protected":false},"author":2,"featured_media":373792,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[174],"tags":[172451,172452,79,172453,179,18,19,17,172454,5,11713,172455,172450,172456],"class_list":{"0":"post-373791","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-economy","8":"tag-alternative-lenders","9":"tag-blue-owl","10":"tag-business","11":"tag-credit-liquidity","12":"tag-economy","13":"tag-eire","14":"tag-ie","15":"tag-ireland","16":"tag-market-stress","17":"tag-news","18":"tag-private-credit","19":"tag-private-credit-market","20":"tag-private-credit-private-credit-market-blue-owl-credit-liquidity-alternative-lenders-private-debt-market-stress","21":"tag-private-debt"},"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@ie\/116191769679260701","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/posts\/373791","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/comments?post=373791"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/posts\/373791\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/media\/373792"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/media?parent=373791"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/categories?post=373791"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/tags?post=373791"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}